The Financial Services Authority (FSA) is now putting more emphasis on the way in which firms manage themselves, focusing primarily on four areas.
The first is corporate governance. In this, the FSA will now take a significantly closer and more active interest in the role of the board. In particular, firms will need to ensure their board members have a sufficient range of skills and experience to provide both proper control and an independent challenge to existing practices and procedures.
This will include suitably qualified non-executive directors. This is not a new area of supervisory attention but will now be given increased weight under the new regulatory regime.
The Approved Persons regime has also come into effect supported by a code of conduct. This requires approved persons, including directors, to act with integrity, due skill, care and diligence, to observe proper standards of market conduct and to deal with the FSA in an open and co-operative way.
Additionally, approved persons performing ‘significant influence functions’ must take reasonable steps to ensure the business of the firm for which they are responsible is organised, so that it can be controlled effectively.
They must exercise due skill, care and diligence in managing the business of the firm. They must also take reasonable steps to ensure the specific business of the firm complies with the relevant regulatory requirements.
From now on, applicants for roles covered by the Approved Persons regime will require prior approval from the FSA.
The second area is risk management. There is an increasing need to establish and maintain risk management teams, including actuarial, legal and financial skills, to apply control over the business. There is a need to determine and document policies for dealing with risk. Risks may include:
l Environment, such as political and legal, socio- demographic, economic factors and competition.
l Strategy, such as the nature of the business, business ethics, changing group structure.
l Markets such as asset risk, credit risk, litigation risk.
l Technological change, such as product design, client base and new distribution systems.
l Fraud.
l Money laundering.
Legal risk in particular has assumed greater importance in recent years because of new legislation, legal precedents and the emergence of increasingly complex transactions containing inherent legal uncertainties. The FSA believes these situations can present significant risks to policyholders and that firms should be proactive in managing these risks.
Third, systems and controls. The Principles for Business and Senior Management Arrangements, Systems and Controls set down in the FSA’s Handbook of Rules and Guidance place increased responsibility on management. In particular, to create and maintain proper systems and controls, to oversee effectively the different aspects of the business and to demonstrate that they have done so.
The current FSA Application Pack ‘ Systems Section, Section A5, has 12 sections requiring detailed information from all applicants on:
l Transaction reporting.
l Transaction recording.
l Settlement systems.
l Accounting systems.
l Position risk requirements.
l Adequate credit management policy.
l Business usage.
l Complexity of IT systems.
l Implementation details.
l IT governance, infrastructure and controls.
l Auditor’s report.
l Supporting documents.
The information and level of detail required, make it clear that the FSA considers this to be an important aspect of any applicant firm’s arrangements and it is likely that more controlled functions will be identified as FSA regulation embraces mortgage and general insurance.
And finally, training and competence. This is seen to be a key element of a firm’s overall management arrangements. All insurance firms covered by the Financial Services and Markets Act are now required to comply with high-level standards for the training and competence of all their staff.
The FSA has launched a full-scale review of all financial services regulatory qualifications and intends to produce a single, robust and high quality examination framework that will raise standards of competence within all firms.
This review will address the gaps, inconsistencies and weaknesses of the current arrangements and may lead to re-testing to ensure practitioners keep up-to-date with market and regulatory developments.
Within this review, higher priority will now be given to reviewing the insurance qualifications. Consideration will also be given to whether further roles within the insurance industry should be included in the detailed Training and Competence regime.
A recent example of this latter trend has been the introduction, for the first time, of standards for life and pensions administration activities.
Sir Howard Davies, chairman of the FSA, stated: ‘Improving management competencies really produces a win, win situation. Policyholders can feel more secure, shareholders can gain better returns and regulators can sleep at night.’
It is clear that more emphasis is being placed by the FSA upon regulating senior management rather than the firm itself.
Ian Langley is a tutor with Incisive Training, a professional training organisation set up in conjunction with Mortgage Solutions to help mortgage advisers to pass the MAQ qualification. He is also a director of IFAct Mortgage Framework Ltd, which specialises in Compliance Solutions for the Mortgage Industry and is part of the IFAct Group of Companies.
